1. 1 Monetizing Labrador Shelf Gas – Group Project Master Oil and Gas Studies Memorial University December 16, 2004 By: Lloyd Button Randy Hiscock Penny Norman Luis Serrano

2. 2 Purpose Technical and economic feasibility of commercializing stranded gas development offshore Labrador

3. 3 World Energy Demand Trends Demand warrants serious consideration for Province’s future economic growth

4. 4 Field Locations

5. 5 Geology RESERVOIR Labrador Shelf Stratigraphic Chart Labrador Shelf Cross-section Hopedale Area Source: CNOPB

6. 6 Resources Potential Resources GAS (TCF) Condensate (MMBL) Potential Resources18.99500.1 % Discovered17.29.2 Discovered Resources FIELD Proven Gas (TCF)Proven Condensate (MMBLS) North Bjarni2.24782 Gudrid9246 Bjarni24.331 Hopedale1052 Snorri1052 TOTALS4,244123

7. 7 Exploration History Labrador Shelf Significant Discoveries

8. 8 Methods for Transportation Gas gathering and transmission via pipeline. Volume reduction (liquefaction (LNG) or compression (CNG)) followed by marine transportation. Conversion to other products by changing from methane molecule (GTL) followed by marine transportation; and Conversion to other energy forms such as electric power and transmission via subsea cable.

9. 9 Production Volume verses Distance to Market

10. 10 Process Facilities CNG is the most viable method of transporting gas from Labrador The processing and conditioning will depend on CNG requirements ( most likely they will have the same as pipelines) Requirements will depend on the flow rate, composition, temperature, and pressure of the produced gas and the components/impurities

11. 11 Main Processing Considerations Remove water vapor to avoid the hydrate formation and corrosion Removal of solids Removal of gas condensate No H 2 S or CO 2 Heating Required

12. 12 Options Considered Floating production storage offloading (FPSO) with CNG tankers; Caisson / Island - CNG tanker; and Concrete gravity based structure (GBS) - CNG shuttle tanker

13. 13 Option 1: FPSO-CNG Wells Drilled from separate MODU

14. 14 Option 2: Caisson/Island-CNG

15. 15 Option 3: GBS-CNG

16. 16 Economic Analysis Assumptions Field Size Base Case: 2.3 TCF (Bjarni North field) High: 5.0 TCF Low: 1.5 TCF Price Base Case of $US 4.30 / MCF High: $US 5.45 / MCF Low: $US 3.20 / MCF. Economic sensitivities Royalties: 5% & 10%, CAPEX: high and low models Exploration risk assumed to be zero Operational down time assumed to be the same for all three assessed options (100 days/year)

17. 17 Economic Analysis - Results FPSO – CNG gave most favorable economic based on: Cashflow NPV discounted at 10% & 15% ATROR GBS-CNG produced marginally more attractive economics vs. Caisson/Island- CNG

18. 18 Economic Analysis - Findings Only FPSO-CNG is feasible with gas prices of $US 5.00 / MCF or less Other options require 4.0 TCF or higher and / or the significant higher gas prices

19. 19 Economic Analysis - Sensitivities 1. Development costs (most sensitive) 2. Pricing 3. Reserve Size

20. 20 Results

21. 21 Economic Analysis - Royalty Royalty of 5% and 10% had modest sensitivity impact However, base reserve and price, 5% and 10% royalty result in marginal to sub-marginal economics Given political sensitivity with foregoing royalty revenue, other revenue methods must be considered

22. 22 Other Revenue Sources [Randy any ideas??] Confirm higher reserves (exploration) Higher Prices likely

23. 23 Source: IHS Energy Benchmarking

24. 24 Fiscal System Benchmarking Benchmarked with the following countries: Netherlands Ireland Norway Trinidad Alaska Canada – Nova Scotia

25. 25 Benchmarking Recommendations(1) Pricing tied to NE US price and linkage to price of competitor fuels No domestic market obligation or export restrictions (i.e. lack of infrastructure, small dispersed population - no local market) Consider State involvement for direct marketing of its share

26. 26 Benchmarking Recommendations(2) Local content quota, with focus on Labrador people, in the issuance for future exploration licenses and SDL’s. Province must be innovative and flexible in making new gas legislation to promote exploration. Gas fiscal terms and tax incentives need to balance restricted operating environment with accrued economic value

27. 27 Significant Discovery License (SDL) Issued by CNOPB SDL have no prescribed date for expire No economic trigger for operator to move forward when market conditions allow No requirements for company to periodically revisit economics if pricing environment changes

28. 28 SDL - Recommendation Requirements should be designed to place onus on operators to revisit the economics on a bi-annual basis The trigger could be when the gas price exceeds a specific threshold

29. 29 Market Analysis – NE US

30. 30 Justification for NE US Market Reserve Size Proximity to NE US US gas pricing (vs Europe pricing) Low local domestic consumption

31. 31 Local Benefits The people of Labrador should be the ones who benefit most Best opportunities in marine transportation Particular emphasis should be on training in marine sector Other opportunities at the offshore facility and onshore support

32. 32 Local Labour Content Overall Project

33. 33 Local Labour Content Drilling

34. 34 Local Labour Content Facilities Construction

35. 35 Local Labour Content Facilities Installation

36. 36 Local Labour Content Transportation

37. 37 Local Labour Content Management

38. 38 Local (Labrador) Stakeholders The Innu Nation The Labrador Inuit Association Labrador Métis Nation The Newfoundland and Labrador Association of Municipalities Individual Communities on the south Labrador Coast not included above Labour Organizations (collective agreements)

39. 39 Adjacency Principle People of Labrador should have first chance for the competitive supply of labour and services Members of the Innu Nation and Labrador Inuit Association Members of Labrador Métis Nation. Other residences of Labrador who are members of collective bargaining agencies Other residences of the Province of Newfoundland and Labrador.

40. 40 Diversity In addition to First Nations people, commitment to provide fair and equal opportunities should be given to: Women People with disabilities Other visible minorities

41. 41 Local Contracts Onshore base including Port Development and infrastructure (buildings, roads, utilities etc) Temporary Services for Port Development Environmental Monitoring Onshore site surveying Helicopter Transportation Others

42. 42 Corporate Social Responsibility Centre for Marine CNG in Harsh Environments Co-ordinated Training Plan for Labrador Centre for Marine Training Quebec/Labrador North St. Lawrence Road Scholarships

43. 43 QHSE - Policy Protection of workers Protection of environment Desirable quality Modest Profit

44. 44 QHSE Design of QHSE Process Loss Avoidance vs Max Profits Human Element Investor/Owners Management Workforce

45. 45 QHSE – System Integration “Us and Them” Gap Demonstrative actions (physical behaviour) Communications (face to face meetings, focus groups, personal written notices, a vehicle for “bottom up” communications as well as “top down) Consistent reactions to all incidents Regular follow-up and closeout Safety training and drills

46. 46 Environment Impact - Exploration Reported effects in mammals Reported effects in fish Seismic guns deployment (determine environmental effects, horizontal Vs downward) Other means of exploration and data acquisition are less harmful to environment (electrical surveys, gravity, magnetic, satellite, etc.)

47. 47 Environment Impact - Drilling Drilling fluids Impacts water column and seafloor differently Reduce light penetration Decrease in sea life biological changes in fish larvae Technology and advances in drilling fluids can reduce impact

48. 48 Environment Impact - Drilling Drilling Cuttings Impact is proportional to solids discharge The fate of the drilling cuttings piles depends on thickness, ocean condition, conditions of discharge and fluids retention on cuttings Estimate1-2 years for initiation of recovery after discharge has stopped Limits for discharge imposed by law

49. 49 Environment Impact - Production Most significant contaminant is the produced water Produced water is composed of dispersed oil and dissolved organic compounds, metals, including aromatic compounds, organic acids, phenols, inorganic compounds, and also of chemicals added in the production/separation line. Its chemical composition varies over a wide range and depends on attributes of the reservoir’s geology. The produced water and any other discharge are closely monitored to minimize adverse effects

50. 50 Environment Impact – De-comissioning Disposal in deep waters can impact sea life May be considered for an artificial reef Removal and dismantling of the installation is an option

51. 51 Environment Impact – Spills Operator company must submit contingency plans for environmental emergencies to CNOPB CNOPB liaisons with environmental advisory agencies CNOPB helps to design and implement the process through which the public may participate in the review

52. 52 Conclusion (1) 4.3 TCF of gas, potential of 19 TCF FPSO – CNG option most favorable Base reserve and price, 5% and 10% royalty result in marginal to sub-marginal economics Given political sensitivity with foregoing royalty revenue, other revenue methods must be considered

53. 53 Conclusion (2) Exploration to confirm reserves required Gas Clause Required Market – NE US Local Benefits Agreements required, other local initiatives that could be taken